Banks and building societies have recently been writing to their customers to inform them of a change to the way interest is taxed. What does this really mean for you?

Until now, savings interest has usually been paid net of deduction of basic rate tax. This will no longer be the case and from April 6th will be paid gross. For most savers this will represent a 25% increase in what they receive. Granted, at current low interest rates, this could mean an increase of not very much, but will be welcome. However, before you go spending that extra money, the tax implications need to be considered.

Interest whilst being paid gross is still taxable, but a new Personal Savings Allowance will mean that most people have no tax to pay. The allowance means that basic rate taxpayers can earn savings income of £1,000 and higher rate taxpayers £500 before they have any tax to pay. Additional tax payers do not get any allowance.

If you earn interest above this allowance, there will be a tax liability to pay and the amount in excess of the allowance will have to be declared by self-assessment through a tax return or you are at risk of being fined.

At 1% interest, you would need £100,000 to reach the £1,000 interest threshold. If you’ve been lucky enough to earn 2.5% interest on your savings, you would need £40,000.

Sound financial planning taking into consideration all of your investment and savings assets, how they are held, in what investment vehicle, can help mitigate the tax implications. For example, tweaks to the type of investments held or, moving interest bearing investments into an appropriate tax wrapper, could mean the difference between paying a lot of tax or no tax.